A Global Value Chain Assessment for the Sustainable Wood Production and Processing Sector in Croatia Croatia Competitiveness Reinforcement Initiative Project Stribor November 2016 This volume is a product of the staff of the International Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations and other information shown on any map in this work do not imply and judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. This note was prepared by Blair Edward Lapres and Domagoj Dragutin Macek in the World Bank with inputs from Domagoj Šarić, Ana Ivanković, Ivana Šarić, and Marina Kopjar at the HGK Center for Industrial Development (CIRAZ). The findings, interpretations, and conclusions expressed in this report do not necessarily reflect the views and position of the World Bank Group, or the Government of Croatia. They are provided as an intermediate output of the Croatia RAS. Note that this report uses a variety of data sources. WITS trade data is pulled directly from UN COMTRADE and it relies on country reporting. FAO Forestry production and trade statistics may contain official, semi-official, estimated or calculated data. The Croatian Bureau of Statistics – Agriculture, Forestry, Fisheries and Environment Directorate – holds official statistics for enterprise, production, price and economic accounts in the forestry sectors. FINA data provides aggregate financials reported by companies through mandatory filings. Cover photo: © Can Stock Photo / brankica 1 AIK Agencija za investicije i konkurentnost A02 Forestry and logging C16 Manufacture of wood and of products of wood and cork, except furniture C17 Manufacture of paper and paper products C31 Manufacture of furniture CAGR Compound Annual Growth Rate C Coniferous CLSAB Canadian Lumber Standards Accreditation Board COC Chain-of-Custody CF Croatian Forests (Hrvatske Šume) EU European Union FAO Food and Agriculture Organization of the United Nations FDI Foreign Direct Investment FINA Financijska agencija (Croatian Government Financial Agency) FSC Forest Stewardship Council FYR Former Yugoslav Republic GDP Gross Domestic Product HGK Hrvatska Gospodarska Komora (Croatian Chamber of Economy) HH Herfindahl–Hirschman Index Kn Croatian Kuna M2 Square Meters M3 Cubic Meters MDF Medium-density fibreboard MOA Ministry of Agriculture MOU Memorandum of Understanding NA Not Available NACE Nomenclature statistique des activités économiques dans la Communauté européenne NC Non-Coniferous (Deciduous) Trees NLGA National Lumber Grades Authority (of Canada) NQI National Quality Infrastructure OEC Organization for Economic Complexity OSB Oriented Strand Board pcs pieces RCA Revealed Comparative Advantage R&D Research and Development SOE State Owned Enterprises USD United States Dollars WITS World Integrated Trade Solutions 2 ............................................................................................................................................... 2 ........................................................................................................................................... 5 ................................................................................................................................. 9 ................................................................................................................................. 9 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.......................................................................................................................................... 44 4 The overall objective of the current technical advisory services is to assist and support the Ministry of Economy Entrepreneurship and Crafts in its efforts to strengthen Croatia’s clusters position in selected Global Value Chains according to 13 Thematic and Sub-thematic Priority Areas (STPA) as defined under the Croatian Smart Specialization Strategy (S3). The current advisory work consists of the following five components which are outlined below:  Component 1: Strengthening the Capacity of Beneficiaries and Partners  Component 2: Strategic Analysis and Competitive Positioning  Component 3: Action Plans and Policy Design  Component 4: Design of Academy for Industrial Development (AID)  Component 5: Monitoring and Evaluation The list of deliverables under the current project is presented below. Component Deliverables Component 1 1. Programs and training modules and comprehensive set of teaching materials to train the Client and HGK competitiveness experts. 2. Six modules of five days of training taught by international professors (at least 18 trained competitiveness experts in Beneficiary’s and Partners’) Component 2 (STPAs 1-7) 3. Report on “Assessment of GVC Positioning of the STPA” (7 documents, one document for each STPA 1 to 7) 4. Report on “Strategic Segmentation”, covering the following sections: Industry Analysis, Strategy Diagnostic and Roadmap, and Short Term and Long Term Strategic Plan (7 documents, one document for each STPA 1 to 7). Component 3 (STPAs 1-7) 5. Report on “Investment Plan Proposal” containing partnerships for joint investments to improve the position in GVC for each STPA (one document for the group of STPAs 1 to 7) 6. Report on “Action Plan to strengthen the position of Croatia in selected GVCs” containing short term measures that could be implemented within 2 years as well as measures for midterm and long term period (one document for the group of STPAs 1 to 7) 7. Report on “FDI Strategy” covering the following sections: Identification of niches and markets to attract FDI; Action Plan to attract investment in high technology sectors and emerging industries; and Action Plan for FDI promotional activities with marketing plan and branding strategy (one document for the group of STPAs 1 to 7) 8. Report on “Export Strategy” covering the following 5 Component Deliverables sections: list of products, services and markets for prioritization; and Action Plan for the promotion of exports (one document for the group of STPAs 1 to 7) 9. Report on “Territorial and Product Branding Strategy” covering the following sections: list of Croatian brands and territorial and product brands in GVCs; and Action Plan for territorial and product branding (one document for the group of STPAs 1 to 7) Component 2 (8-13) 10. Report on “Assessment of GVC Positioning of the STPA” (6 documents, one document for each STPA 8 to 13)1 11. Report on “Strategic Segmentation”, covering the following sections: Industry Analysis, Strategy Diagnostic and Roadmap2, and Short Term and Long Term Strategic Plan (6 documents, one document for each STPA 8 to 13). Component 3 (STPAs 8-13) 12. Report on “Investment Plan Proposal” containing partnerships for joint investments to improve the position in GVC for each STPA (one document for the group of STPAs 8 to 13) 13. Report on “Action Plan to strengthen the position of Croatia in selected GVCs” containing short term measures that could be implemented within 2 years as well as measures for midterm and long term period (one document for the group of STPAs 8 to 13) 14. Report on “FDI Strategy” Report on “FDI Strategy” covering the following sections: Identification of niches and markets to attract FDI; Action Plan to attract investment in high technology sectors and emerging industries; and Action Plan for FDI promotional activities with marketing plan and branding strategy (one document for the group of STPAs 8 to 13) 15. Report on “Export Strategy” covering the following sections: List of products, services and markets for prioritization; and Action Plan for the promotion of exports (one document for the group of STPAs 8 to 13) 16. Report on “Territorial and Product Branding Strategy” covering the following sections: list of Croatian brands and territorial and product brands in GVCs; and Action Plan for territorial and product branding (one document for the group of STPAs 8 to 13) Component 4 17. “Guidelines on design and management model for AID” containing the following sections: proposal for 1 This document will aggregate the information from the individual clusters into a single report, which will include information on: (i) first results of the Value Chains Enterprise Survey; and (ii) Croatian Value Chains Maps assessment. 2 Identification of the strategic segments to upgrade within the 13 S3 STPAs and forecast of the possibilities for further development in 13 GVCs. 6 Component Deliverables operational concept and management model for AID, Action Plan for AID; and proposal of the content for the first Summer School for Competitiveness’ two-week program (one document). 18. One set of (minimum 8) developed educational modules for entrepreneurs at AID 19. Training sessions for trainers (at least 16 certified trainers) Component 5 20. Report on “Monitoring and evaluation (M&E) of cluster initiatives”3 (one document). 21. (two) training sessions on M&E for beneficiary’s institution In the context of Components 2 and 3, the methodology for analyzing the industry specific GVC of each STPA follows the ten-step approach as listed in Box 1 Box 1 – Cluster-Level Global Value Chain to Reinforce Competitiveness The methodology for the analysis of Croatia’s industry from an Industry Specific Global Value Chain perspectives is adapted from the “10 Steps” commonly used to analyze the competiveness of clusters and identify strategic options for their growth: 1. Mapping of the Value Chain Activities in the STPA 2. Existing and Emerging Strategic Segments globally for each STPA 3. Strategic Segments Attractiveness Evolution globally 4. Advance Global Buyers Purchase Criteria for each Segment 5. Generic Strategic Options for each Segment 6. Key Success Factors of each Segment 7. Ideal Value Chain and Supporting Environment for each segment 8. Segment suitability in function of Value Chain gaps and policy choices 9. Options for company position in the new segment 10. Definition of Areas to Improve at Company, Cluster and Policy Level The current documents constitute Deliverable 3 (“Assessment of GVC Positioning of the STPA”) of the current project. It presents the results of the data collection on the Croatian Industry at National level and presence of activities in the GVC, needed as the 1st of the 10 Steps as described in Box 1. This information comes from secondary data and from direct company and institutions interviews; 3 This report will present the M&E framework and key performance indicators. 7 unfortunately due to delays in the company interviews, it lacks that information, but it is expected to be complemented during the rest of the project. The bulk of the analysis under Component 2 comes in the next Deliverable 4 (“Strategic Segmentation”) that includes the Industry Analysis, Strategy Diagnostic and Roadmap, and Short Term and Long Term Strategic Plan (steps 2nd through 9th of the 10 Steps described in Box 1).  Background and contextual industry research is conducted to identify industry dynamics and trends related to global supply, industry cost structure and margins, recent evolution in value chain structure  The industry is grouped into strategic segments4 that reflect not only the mix of products and services that are offered, but also the users and markets that are served.  Each strategic segment Porter’s ‘Five Forces’5 analytical tool is used to assess industry attractiveness by determining the profitability of the industry and identifying the actors within the industry with the most bargaining power (thereby determining which actors appropriate the bulk of the available profits). This analysis is looks at the trends in attractiveness by looking at the forces in the recent past (before entering new FTA for example) and in the future 5-10 years, taking into consideration the structural industry trends.  The advanced buyer purchase criteria, generic strategic options and the key success factors are used to determine the ideal value chain for each segment and identify the necessary value chain systems that need to exist and local, national and regional level within a country’s ecosystem in order for it to compete well.  More attractive, higher-value added segments that could allow Croatian industry to appropriate more value will be highlighted. The ‘ideal value chain’ for those segments will be compared to the Croatian context which will itself be compared to leading countries in the highlighted segment(s) to assess Croatia’s potential capacity to compete. The third set of Deliverables (5, 6, 7, 8 and 9) ) as defined under Component 3, covers the specific policy, investments and/or institutional interventions that would be required in order for Croatia to ‘leap’ to those segments. That is the step 10 in the 10 Steps described in Box 1.  Deliverable 5 Report on “Investment Plan Proposal” containing partnerships for joint investments to improve the position in GVC for each STPA  Deliverable 6 Report on “Action Plan to strengthen the position of Croatia in selected GVCs” containing short term measures that could be implemented within 2 years as well as measures for midterm and long term  Deliverable 7 Report on “FDI Strategy” covering the following sections: Identification of niches and markets to attract FDI; Action Plan to attract investment in high technology sectors and emerging industries; and Action Plan for FDI promotional activities with marketing plan and branding strategy  Deliverable 8 Report on “Export Strategy” covering the following sections: list of products, services and markets for prioritization; and Action Plan for the promotion of exports.  Deliverable 9 Report on “Territorial and Product Branding Strategy” covering the following sections: List of Croatian brands and territorial and product brands in GVCs; and Action plan for territorial and product branding. 4 Porter, Michael E. (1985). Competitive Advantage 5 Porter, M.E. (March–April 1979) How Competitive Forces Shape Strategy, Harvard Business Review 8 Despite comprising less than 1 percent of the economy, the wood production and processing industries represented more than 8 percent of all Croatian exports6. These values have increased by over 31 percent since 20127, demonstrating its importance for foreign exchange earnings. Moreover the industry employs over 27,213 people in directly linked industries and innumerable others in supporting industries. Nonetheless the recent global economic slowdown stands to reduce industry growth in the coming 2015-2016 period. E X P O RTS O F WO O D P RO DUCTS I N CRO ATI A $900,000 Wood and EXPORTED VALUE (US $) THOSUANDS $800,000 articles of wood $700,000 $600,000 Wood pulp $500,000 $400,000 Paper and $300,000 paerboard $200,000 $100,000 Furniture $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 DATA SOURCE: UN COMTRADE Beyond the volatility observed in the past year, EU accession has structurally changed the industry, which is marked by an increasing integration into the global value chain. The manner of this integration has precipitated shifts in production and profits across the industry. A rise in the production of fuel wood (a result of EU renewable energy subsidies and eliminated tariffs with trading to the EU) is coming at the expense of (official) production in Industrial Roundwood, which is a main input into the Manufacturing sectors. These subsidies are creating increasing competition for raw input supply and may be increasing illegal logging. Production of sawn wood has historically been sourced from domestic forests, but now sawmill/planning firms are increasingly gaining raw input from suppliers in neighboring Austria, Slovenia, etc. Participation in these global value chain activities are becoming quite profitable for sawmilling firms, which have benefited from high foreign demand for sawn wood lumber. While the integration into the EU has also helped expand the market for Croatian furniture, it has also had to increasingly contend for raw resources with producers of energy, construction materials and furniture. Going forward it will be important for the wood-based furniture industry to redefine its strategy in order to contend with an increasingly competitive global market. 6 Croatia has comparatively low rate of consumption of wood products compared to other EU member states, especially Finland and Austria (Kersan-Škabić, 2014). 7 The majority of these exports were oriented toward neighboring EU states, notably including Italy, Germany, Slovenia, and Austria. 9 Wood production and processing has a long tradition in Croatia stemming from the early thirteenth century. In more recent history, furniture and lumber were two of the most important export products of the former Yugoslavia. However, the importance of the wood based economy is perhaps best exemplified by the notoriety of “Stribor” – the sapient head of the forest who presented a set of mutually exclusive choices for the protagonist – in mainstream Croatian literature. Beginning in the early 1990’s the economy began to adapt to the free market. Government procurement – which had sustained the furniture industry in the former Yugoslavia – was no longer a source of demand, leading many former furniture industry firms to re-establish operations in less capital and knowledge intensive activities (e.g. sawmills and parquet production firms). As time went on, a number of small- and medium-size companies began to rapidly emerge given the relatively low barriers to entry (Maxwell Stamp PLC, 2013A). Since joining the EU in 2013 the industry has undergone another structural shift driven by new market access and reduced tariffs. From the turn of the century public agents have been actively supporting the wood production and processing industry through acts of Parliament and through the activities of various ministries, including the Ministry of Agriculture, Forestry and Water Management; Ministry of Economy, Labor and Entrepreneurship; Ministry of Regional Development; as well as through Hrvatske Šume8, the Food and Agriculture Organization of the United Nations (FAO) and other semi-public agents. Moreover, the development of privately led industry groups has precipitated a number of campaigns to promote the wood based economy. These public and privately led operational strategies are mapped on the timeline below. Timeline of Government Intervention in the Wood Production and Processing Sector9 The sector has also been subject to forestry regulations of the EU since accession in 2013 (Timber Regulation, 2010). Now all enterprises dealing with the procurement of wood material and wood products are regulated under these rules and bear responsibility for the legal sourcing of supply. The effective application of these regulations will increasingly be relevant if problems with illegal logging continue. Leading firms have increasingly turned to certification agencies10 in order to verify 8 In Croatia the wood industry is fed by ample forests, a natural resource which is largely controlled by the state owned enterprise Hrvatske Šume. 9 See Annex 1 for program description and implementing agency. 10 The Forest Stewardship Council Chain-of-Custody (FSC CoC) certification for Wood and Paper Products is the most well recognized private regime for assuring buyers that producers are meeting stringent environmental, ethical, and economic sourcing standards. More than 150 wood processing companies had obtained the FSC-CoC certificate by 2013 (Maxwell Stamp PLC, 2013A). 10 sustainable sourcing. Support of a robust National Quality Infrastructure (NQI) system can assist in developing systems for ensuring traceability of product through the value chain. Most notably, the Smart Specialization Strategy identifies the Wood Production and Processing Sector as a Sub-Thematic Priority Area (STPA) for the Croatian economy given its share in exports and the natural resource endowments available in Croatian forests. The sector covers an expansive set of industries that produce a range of industrial products (pallets, paperboard, etc.) and consumer products (furniture, wooden tools, etc.). Downstream industries can be split between wood products and wood-based furniture products (see Annex 3 for a schematic product map). The strategy places heavy emphasis on innovative solutions to increase primary production and improved processes for the valorization of wood through new materials and sustainable constructs. 11 Primary production is centered around Lika-Gorski Kotar and Slavonia. Upstream industries are increasingly more geographically dispersed – both within Croatia and beyond – as a result of reduced transportation costs and tariffs. Approximately 2.6 million hectares of land in Croatia are forested. Of this amount 500,000 hectares are privately owned – by a fragmented set of nearly 600,000 proprietors – and are estimated to produce 12.5% of the growing stock (Maxwell Stamp PLC, 2013A)11. The remaining 2.1 million hectares is state owned, of which 80-90 percent is designated for commercial purposes with control given to Hrvatske šume12. Hrvatske Šume Ltd. is FSC certified State Owned Enterprise (SOE). In December 2012 the Ministry of Economy and the Ministry of Agriculture developed a local content policy on the sale of logs, which was implemented through Hrvatske Šume. Most notably this policy established a process for tender and a framework for the sale of product to different categories of buyers. The process for tender. Log sales are conducted on the basis of contracts and auction13. Up to 30 percent of removals are slated for auction14, while 70 percent of production is awarded through forward contracts with firms on the year prior to removal. In 2016 an announcement listed 2,000,000 m3 as the total amount available for public tender through contracts (Hrvatske Šume, 2015B). The agreements – which can be signed up until December 31st of the preceding year of effectiveness – specify the price, quantity, varieties and other conditions15. The Hrvatske Šume framework for contracts attempts to differentiate prices and quantities supplied on: past performance, total production capacity of processing facilities, incorporation status (domestic or foreign)16, and purpose. The purpose criteria are geared towards funneling product to higher value added domestic activities (see Annex 4), such as furniture manufacturing (Posavec & Beljan, 2013). Firms attempting to contract for lower value added purposes are constrained in the amount of raw supply that they can obtain. In 2014 the government introduced new rules on the sale and export of wood, which were further strengthened in 2015.17 Recently there were calls by the Chamber of Economy to reform the system processes and frameworks (UDRUŽENJE DRVNO-PRERAĐIVAČKE INDUSTRIJE HGK, 2016). 11 “Private forest owners in Croatia possess less than 19 percent of the overall forestland today…which represents approximately 12.5 percent of the growing stock. Due to fragmentized ownership of the private forestland the average property surface area is only 0.75 ha” (Maxwell Stamp PLC, 2013A). 12 “Hrvatske sume d.o.o. (Croatian Forests Ltd. / CF) have responsibility for managing forestland utilizing sixteen secondary- level forest management offices and 169 forestry units, since 2009. CF Ltd. is a trade company that manages around 80 percent of the national forests” (Maxwell Stamp PLC, 2013A). Each sub-divisions afforded a management plan for a period covering 10 years (Hrvatske Šume, 2016). 13 Marginal amounts of firewood are sold to households and individuals at fixed prices. 14 Auctions held by Hrvastke sume are regulated by the “Regulation of auction of certain wood products” (Uredba o dražbi određenih drvnih proizvoda, 2014). 15 The contract is typically signed for a duration of 10 years. 16 In 2015 over 88% of log sales (1,927,175 m3) were made to domestic wood processing companies (Hrvatske Šume, 2015C). 17 See (Uredba o dražbi određenih drvnih proizvoda, 2014) and (Uredbu o Dražbi Određenih Drvnih Sortimentata, 2015). 12 The primary product of the sector is roundwood, which can be differentiated between those of Coniferous18 (‘softwood’), and Non-Coniferous19 (‘hardwood’) origin. Hardwood is generally of higher quality/price and in Croatia is approximately 44% more expensive than softwood (Croatian Bureau of Statistics, 2016). Softwood is typically used in construction and in pulping. Approximately 85% of Croatia’s roundwood is hardwood, while the remaining 15% is softwood (Savjetodavna služba, 2016).20 Estimates have put the revenue from primary production at more than 50 percent of the wood-processing sector turnover (Maxwell Stamp PLC, 2013B). Roundwood can further be differentiated by its purpose; including both wood for fuel (“Fuel Wood”) and wood for industrial use (“industrial roundwood”). Fuel Wood is an input into the renewable energy sector and into household heating use. Industrial roundwood is the main product feeding into the industrial sectors and notably feeds into sawn wood and pulp wood production process. The FAO estimates that 5,925,949 cubic meters of roundwood was produced by Croatia in 2015, of which 3,625,665 cubic meters was industrial roundwood. Production quantities of Industrial Roundwood have declined 4.46% since 2012, while Roundwood production as a total has increased at an annualized rate of 1.22% over the same period. Wood fuel21 comprised a 38% share of this roundwood output and it has been increasing rapidly with a 13.89% Compounded Annual Growth Rate (CAGR) between 2012 and 2015. The increase in production of wood fuel may have implications for downstream use in the manufacturing sector since its production may come at the expense of downstream industrial uses. 18 The Conifers are cone-bearing plants with woody tissue. Conifer wood is mainly used for lumber and paper making. 19 Non-coniferous wood originates form deciduous trees that produce leaves, which they lose for at least part of the year. 20 In 2009 the FAO estimated that Croatian forests were composed of the following coniferous species: 36% Beech (Fagus silvatica); 12% Pedunculate oak (Quercus robur); 10% Sessile oak (Quercus petrea); 9% Hornbeam (Carpinus betulus); 3% Narrowleaf Ash (Fraxinus angustifolia); 11% Other hard broadleaved species; and 6% Soft broadleaved species. Coniferous forests were estimated to be composed of 10% Abies and spruce (Abies sp. and Picea sp.); 2% pine; and 1% other coniferous species (FAO, 2009). It is estimated that there was 2.3 million ha of beech species in 2013 (Maxwell Stamp PLC, 2013A). 21 Nearly 95 percent of wood fuel production is non-coniferous. 13 8,000,000 Croatian Roundwood Production 6,000,000 M3 4,000,000 2,000,000 0 1999 1992 1993 1994 1995 1996 1997 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FAOSTAT Industrial Roundwood(C) Wood Fuel(C) Industrial Roundwood(NC) Wood Fuel(NC) 2012-2015 CAGR of Production Roundwood Total 1.22% Wood Fuel 13.89% Industrial Roundwood -4.46% Roundwood (C) -5.71% Wood Fuel (C) 36.99% Industrial Roundwood (C) -8.46% Roundwood (NC) 2.59% Wood Fuel (NC) 13.15% Industrial Roundwood (NC) -3.30% The Croatian Bureau of Statistics estimates that roundwood production in 2015 was valued at HRK 1,557,882,000. Industrial Roundwood production comprised 76 percent of this with values estimated at HRK 1,195,458,000 (approximately USD$178 million). The vast majority of this Industrial Roundwood was Non-Coniferous (NC) hardwood. In Croatia the average price of Non- Coniferous Industrial Roundwood was HRK 533.62 per m3 (Croatian Bureau of Statistics, 2016). In 2015 Fuel wood averaged HRK 164.42 per m3, which was only 30% the price of hardwood logs. This price, however, does not reflect the margin for producers. Despite the low value of the product, it is apparent that wood fuel exports are driving the production increases in Non-Coniferous roundwood22. The rapid increase in wood fuel exports is likely due to the accession to the EU in 2013, where a combination of reduced tariffs, strong demand stemming from renewable energy subsidies23 (The Economist, 2013) and cheap prices for firewood allowed this low-value product to become more highly profitable24. The increase in demand for fuel wood removals thus potentially crowded out some removal of industrial roundwood (FAO, 2014). Typically industrial roundwood is not traded across far distances given high transportation costs of this primary product. International trade of Coniferous (C) industrial roundwood is still only marginal, however this has grown at a fast rate since 2013 indicating some shift in market incentives. Decreases in the export of Non-Coniferous Industrial Roundwood are broadly consistent with the decreases in aggregate production25. 22 In 2014 wood fuel was exported to Italy (49%), Slovenia (26%), Austria (12%), Hungary (9.8%), and other European countries (3.2%). 23 Croatia also witnessed a sharp increase in other energy wood products – i.e. pellets, charcoal, and Chips and Particles – since 2013 as a result of these subsidies, although quantities supplied are still somewhat marginal. 24 Use of fuel wood and wood pellets is mainly destined for nearby EU countries given that the administrative procedures for establishing a cogeneration plant within Croatia are particularly arduous (Maxwell Stamp PLC, 2013A). 25 However an examination of domestic saw millers production and exports shows that exports of sawn wood are increasing and thus this does not translate to improved competitiveness outcomes for domestic furniture manufacturers (C31). 14 Croatian Export of Roundwood 1000000 800000 600000 M3 400000 200000 0 1998 2001 1992 1993 1994 1995 1996 1997 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Data Source: FAOSTAT Wood Fuel Industrial Roundwood(C) Industrial Roundwood(NC) 2012-2015 CAGR Export Quantity Export Value Production Roundwood 11% 11% 1% Roundwood (C) n.a. n.a. -6% Roundwood (NC) n.a. n.a. 3% Industrial Roundwood 0% 5% -4% Industrial Roundwood(C) 55% 70% -8% Industrial Roundwood(NC) -4% 2% -3% Wood Fuel 19% 19% 14% Wood Fuel(C) n.a. n.a. 37% Wood Fuel(NC) n.a. n.a. 13% After roundwood is processed into industrial roundwood (or firewood) it then enters one of several value chains (see Annex 3). These value chains are mostly captured under the NACE code C.16 for the Manufacture of wood and products of wood, articles of cork, straw and plaiting materials and to a lesser extent C.17 Manufacture of paper and paper products. The products of C16 are often a semi- finished consumer good and so a sub-set of this product is inputted into the C31 Manufacture of furniture value chain. 3.2.1.1. Production of Sawn Wood and Pulp Wood Industrial roundwood can be differentiated between pulp wood (23%) and sawn wood/veneer logs (77%). The latter is relatively high value compared to pulp wood, making sawn wood lumber the most important secondary product. Sawn wood lumber can be cut from industrial roundwood using a number of different techniques – including the Plain Sawn, Quarter Sawn and Radially Sawn techniques – which have opposing effects on quality and resource efficiency (see Annex 3). The qualities of wood – i.e. durability, design, and resource efficiency – from these various cuts and the subsequent drying26, planing and refining all affect the grade27 and value of the lumber28 and therefore the potential value chains that the product will eventually be suited to enter. Pulpwood production stood at 823,914 m3 in 2015 although this marks a dramatic 37 percent decline since its 2011 high. These resources have instead shifted to fuel wood and non-coniferous sawn wood production. As a result this report will not focus on pulpwood products as much. 26 Warping and twisting is prevented by placing the logs in an oven like chamber that dries the pieces rapidly. 27 Various standards for these products are governed by a mixture of public and private sector entities in some countries. The American Lumber Standard Committee is appointed by the US Secretary of Commerce, while Canada has the National Lumber Grades Authority (NLGA) and the Canadian Lumber Standards Accreditation Board (CLSAB). 28 Lumber or engineered lumber is often then subsequently planed, smoothed, or assembled into tertiary products. 15 Sawmilling (C16.1) Since joining the EU the production of sawn wood have increased substantially. The growth in coniferous (C) sawn wood production may be partially attributable to an increase in coniferous sawn wood imports from Austria, Hungary, etc. Coniferous sawn wood exports have also increased 472% since 2012. It is assumed that sawn wood is being imported for further processing (i.e. “planing of wood”) before it is re-exported, although this needs to be confirmed by fieldwork. Planing of wood is a labor intensive activity for which Croatia can supply relatively cheap wages. Croatian Production of Sawnwood 1500000 1000000 Lumber Sawnwood (C) M3 500000 Lumber Sawnwood (NC) 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Data Source: FAOSTAT While the increase in production of sawn wood has been a profitable endeavor for C16.1 firms, it is not a universally positive phenomenon29. An increase in NC sawn wood production – despite decreases in NC industrial roundwood production – cannot be explained by imports. The increase of this production may instead be attributable to either:  A change in production methods from Quarter/Rift sawn methods to Plain sawn methods which reduce waste, but which at the same time reduces quality and value.  An increase in illegal logging – caused by an increasingly lucrative market – which is making its way into the inputs of the sawmilling industry30. Further fieldwork is needed to confirm what is happening. At the same time, Non-Coniferous sawn wood exports have increased 32% and sales to domestic markets have decreased. This is exerting pressures on furniture industry which is increasingly having to compete for raw material and to source hardwood from imports31. In 2015 there were an estimated 25,000 m3 less available for domestic consumption than in 2013. This could be affecting cost structures with implications for the quality and competitiveness of downstream industries. 29 Nearly 93% of sawn wood production was exported, leaving 7% of national production within Croatia for further processing. 30 Prior to EU accession, the independent certification agency EUROINSPEKT-DRVOKONTROLA noted that only 33% of exported wood products had valid customs documentation, and only 68% was estimated to have meet either the public or private standards of the export markets (Maxwell Stamp PLC, 2013A). The ambiguity of origins in the supply value chain and the ambiguity of the quality of the product sold create an enabling environment for a grey market (Kavran, 2016). 31 Imports of sawn wood in 2015 totaled 460,200 m3. This represents a 195% increase (304,200 m3) between 2012 and 2015. Decomposing this further, in 2015 coniferous imports increased to 386,400 m3 (representing 186% increase) and non- coniferous imports increased to 73,800 m3 (251%) in the same time period (FAOSTAT). 16 500000 Croatian Sawn wood 400000 300000 200000 M3 100000 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -100000 -200000 -300000 Sawnwood (C) Imports Sawnwood (NC) Imports Data Source:FAOSTAT Domestic (C) Production Quantity Minus Exports Domestic (NC) Production Quantity Minus Exports Engineered Wood and Pulp Wood32 Croatia produces more marginal quantities of engineered woods33. Although production had been in decline from 2004-2012, it has recently been increasing since joining the EU. Since then production quantities have leveled off. Beyond engineered lumbers, Croatia also makes marginal quantities of Chips and Particles, pellets34 and charcoal, and pulp from paper35. These have recently experienced high growth rates, although they started from a relatively low base. 500000 Production of Other Wood Products 400000 300000 M3 200000 100000 0 Data Source: FAOSTAT Engineered Woods Pellets & Charcoal Pulp for Paper Chips and Particles Semi-Finished36 Croatia has historically also had comparative advantage in semi-finished products (i.e. parquet) and industrial products (wooden containers). The most notable growth and volume in this category comes in the Manufacture of assembled parquet (C16.22), which had a 2014-2015 output growth of 29 percent. In 2013 Croatia was the world’s fourth largest producer of wooden parquet, however the industry was particularly susceptible to the 2008 financial crisis (Maxwell Stamp PLC, 2013A). Table 6. Production of C.16.22, C.16.23, C.16.24 PRODUCT Measuring unit 2013. 2014. 2015. Index 2015/2014 Assembled parquet m2 3,473,001 3,257,530 4,200,906 129 Joinery pieces 74,313 69,188 74,459 108 32 This feeds into the Manufacture of Wood Products (C16.21), Energy Wood (C16.29), and Paper & Pulps (C17) 33 “Engineered wood includes a range of derivative wood products which are manufactured by binding or fixing the strands, particles, fibers, veneers or boards of woo together with adhesives.” The chart above includes values for Wood -Based Panels, Particle Board, Veneer Sheets, Plywood, Fibreboard, Medium-density fibreboard (MDF), Hardboard, and Insulating Board. 34 “The wood pellet industry in Croatia has been developing quickly over the past number of years. Several wood processing companies announced plans to start pellet production in 2012, with a total estimated output of over 180.000 tons per year. In comparison to data from 2005 a significant increase is apparent because in 2005 only one pellet manufacturing company with the total capacity of 10.000 tons per year was active.” (Maxwell Stamp PLC, 2013A). 35 In 2015, Croatia exported nearly USD$200 million of paper and paperboard products, including significant amounts to neighboring Slovenia, Serbia, Hungary, Italy, and Bosnia & Herzegovina. 36 This feeds into the Manufacture of Wood Products: Parquet, Joinery and Containers (C16.22/.23/.24) 17 Manufacture of wooden containers pieces 1,078,830 1,094,730 1,110,669 101 Source: Forest Products Statistics, Timber Bulletin, ECE/TIM /BULL/68/2 via (Savjetodavna služba, 2016). 3.2.1.2. Price and FDI It is important to note that the production of non-coniferous sawn wood is driven by the steadily increasing global price of Non-Coniferous hardwood. While wood is differentiable and cannot be given a single unit value, prices can be observed at a more generalizable level through proxy indicators. The UK non-coniferous woods import price is one such indicator that grew 43% in the decade up to 2013. These price increases are partially driven by the EU renewable energy subsidies, which have increased the demand for fuel wood at the expense of industrial roundwood (The Economist, 2013). As a result of these price effects, the export rate has increased and it has incentivized resource seeking foreign direct investment by firms seeking to reduce costs through vertical integration. Price of Wood Products UK import price index 2005=100 160 $1,200 140 $1,000 120 100 $800 ($/m3) 80 $600 60 $400 40 20 $200 0 $- 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Non-coniferous woods, UK import price index 2005=100, dollar equivalent Item summary (opens new window) Plywood, Africa & South East Asia, Lauan, 3-ply, 91cmx182cmx4mm, wholesale price, Tokyo ($/m3) Data Source: UNCTADSTAT At the same time the Plywood wholesale price from Asia can be used as a proxy indicator for engineered woods. The global price of engineered woods was observed to be falling since 2012. This is partially due to the advent of Oriented Strand Board (OSB), a low cost method of making engineered woods out of low quality materials. OSB has rapidly been gaining market share in the construction material markets of the United States (Prestemon, Wear, & Foster, 2015). It is likely that European producers of engineered wood will face increasing cost pressure from OSB manufacturers in the coming years. 3.2.1.3. Export of Wood Products (C16) As a whole the export value of wood and articles of wood has been increasing substantially as a result of joining the EU. The increase of exports of Coniferous sawn wood are particularly noticeable since hardly any had registered prior to 2013. Yet NC sawn wood still comprise the majority of the volume exported. The main countries that Croatia exports intermediate wood products to include; Italy (28%), Egypt37 (12%) and Slovenia (10%). These countries are also competitive furniture manufacturers. It is most notable that Italy – a country with generally higher cost structures for labor, etc. – is able to compete successfully in the manufacturing of furniture. 37Egypt’s share in Croatian exports for articles of wood has increased substantially since 2006. The main export product to Egypt is sawn timber, primarily beech, which accounts for two thirds of exports. Egypt imports 700,000 cubic meters of beech and about 600,000 square meters of plywood annually, while imports of natural and artificial veneer reached the amount of 13 million square meters (Kotur, 2016). 18 3.2.2.1. Furniture Manufacturing (C31) Further along in the value chain, the Croatian furniture industry has traditionally been very reliant on wood sector inputs38. Changes in the upstream industries for wood and articles of wood are expected to have an effect on the cost of inputs for this industry. Production statistics for furniture manufacturing are broken down by both product and type of buyers. The production of seats has traditionally been quite strong, however growth has slowed recently. Wooden office furniture – a product largely intended for institutional buyers – has low levels of production although some increase in production since 2013. Manufacture of furniture Measuring unit 2013. 2014. 2015. 2013-2015 CGAR Seats39 pieces 1,618,265 1,682,076 1,647,803 1% Wooden office furniture pieces 96,349 102,957 120,393 12% Wooden furniture for shops pieces 26,028 30,772 27,223 2% Kitchen furniture pieces 176,948 240,927 253,313 20% Wooden furniture - home furniture pieces 792,204 787,848 814,290 1% Source: CBS Forest Products Statistics, Timber Bulletin, ECE/TIM /BULL/68/2 via (Savjetodavna služba, 2016). While the production quantities are useful to get a sense of the direction of the industry, it is also important to differentiate the types of furniture, which are not captured through the statistics. These types include solid wood furniture, furniture deriving from engineered woods, and furniture that are a composite of different materials (Maxwell Stamp PLC, 2013A). Furniture made from engineered woods demands lower quality inputs – thus reducing the barriers to entry – and larger economies of scale to compete with low cost manufacturers in Asia. Croatia’s high quality wood supply conversely makes it more feasible to produce solid wood furniture,40 where it can hold a distinct advantage for input supply costs and access to high-value markets. 3.2.2.2. Export of Finished Products (C31) While it is difficult to estimate the value of wood inputs in the volume and value of furniture – given a more varied set of inputs into the production process – a decomposition of the trade data is available for certain categories of wooden furniture41. Wooden seats are the largest identifiable export category although they have been in relative decline since 2008. The lowest identifiable export category is for wooden furniture for offices, which has seen a notable decline in export performance since its height in 2003. Germany is the single largest export destination for Croatian wooden furniture, although France, Austria and Italy also have notable shares. 38 It is estimated that the furniture sector generates less than 50 percent of the wood processing industry turnover (Maxwell Stamp PLC, 2013B). 39 “Chair manufacturing was a trademark of the industry 20 years ago when chairs were mostly exported in the USA. Nowadays, there are only a few serious chair manufacturers left, and they export more than 85% of their production. The largest Croatian manufacturer of chairs is the company Klana d.d. from Primorsko –Goranska county with the manufacturing capacity of more than 1,5 million chairs per year” (Maxwell Stamp PLC, 2013A). 40 Solid wood furniture can further be decomposed between those made of plain sawn, quarter sawn or rift sawn inputs. 41 Estimating wooden inputs into furniture are difficult to calculate since there are a wider range of inputs into the final product and the composition is not adequately captured by the available product codes. The above are likely underestimates of the demand/supply for wood inputs into the furniture industry. 19 Croatian exports of Wooden Furniture USD$ Thousands $50,000 $40,000 $30,000 $20,000 $10,000 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Wooden furniture (excluding for offices, kitchens and bedrooms, and seats) Wooden furniture for bedrooms (excluding seats) Data Source: UN COMTRADE Wooden furniture for kitchens (excluding seats) Wooden furniture for offices (excluding seats) Upholstered seats, with wooden frames (excluding convertible into beds) Seats, with wooden frames (excluding upholstered) PREFABRICATED BUILDINGS MADE ENTIRELY OR MAINLY OF WOOD, WHETHER OR NOT COMPLETE OR ALREADY . . . The export of prefabricated buildings – a product that has similar factor intensities and production processes to furniture– is also beginning to register on trade statistics in Croatia and is the only product that is increasing export performance despite the global slowdown. The main export destinations of prefabricated buildings made entirely or mainly of wood is Switzerland, which imported USD$3.4 million of Croatian-made prefabricated wooden buildings. In the chart below, the vertical axis represents the world growth of imports between 2011 and 2015. The horizontal axis represents Croatia’s share in those imports for a select group of wood products. Croatian prefabricated buildings – including non-wooden constructs – have been rapidly gaining global market share between 2011 and 2015. Sawn wood has increased its market share by 11% in this same period, while world import growth only increased 3%. Product categories placed in the right quadrants indicate areas where Croatian industry is increasing its market share, while those in the left quadrants are product categories where it is decreasing. Similarly those in the top quadrants are product segments that are becoming more traded globally, while those in the bottom are product categories that are becoming less traded. Select Wood Products Growth Rates for Croatian Firms (2011-2015) 15% Seats (9401) Wood Sawn or Chipped Annual Growth of World Imports 10% Lengthwise (4407) Fuel Wood (4401) Particle Board (4410) Wood Charcoal (4402) 5% Fibreboard (4411) Wood in the Rough (4403) 2011-2015 0% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% -5% Prefabricated Buildings Paper, Paperboard, etc. -10% Parquet Flooring (4409) (9406) (4811) -15% Reference Bubble -20% Mechanical Wood Pulp ($100 Million) (4701) -25% Annual Increase in Croatia's share in World Exports 2011-2015 Data Source: (ITC, 2016) 20 Beyond the growth rates, a number of calculated indicators can help reveal where the industry holds an advantage. The table below shows the Revealed Comparative Advantage (RCA)42 of the Croatian wood industry in the observed period. By analyzing values in the RCA, we can conclude that the Croatian wood products industry has traditionally been more specialized than the furniture industry, however this dominance was diminished in 2015 when the sector’s exports took a dive compared to the rest of the economy. The furniture industry was not as susceptible to these shocks and was able to maintain shares in the export basket to a greater degree43. These statistics are useful to view in the context of the Herfindahl–Hirschman (HH) Market Concentration Index44, which measures competition between Croatian suppliers in the export market. The index shows a moderately concentrated industry, albeit with a steady increase in domestic competition for the wood products (C16) industry, meaning that more firms existing within the industry are sharing equally in the export revenues of the industry. This could be due to shrinking size of large wood firms or more likely the increasing number/export share of small wood firms. The HH index for Furniture (C31) has been increasing since 2013 which shows that firms are increasingly not sharing in the export revenues of the industry. This could be due to the growing size of large firms or the shrinking/exit of small firms. Furniture & Wood Industry Performance Indicators 0.18 4 3.5 HH Market Index 0.16 3 RCA 0.14 2.5 2 0.12 1.5 0.1 1 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Wood and Wood Products HH Furniture HH Wood Products RCA Furniture RCA Data Source: WITS Comparative advantage can also be observed at the more granular 6 digit product level. Croatia is the third largest exporter of Beech tree products and is also a significant global supplier of Oak. In 2014 its export RCA for sawn/chipped/sliced Beech and Oak was 204 and 83.1 respectively (Simoes & et alia, 2016). However, Croatia also has high RCA in the export of Beech (53.7) and Oak (54.5) in the rough, which underlies the export of a very valuable and scarce Natural Resource for value addition in other countries. Croatia has a very strong but slightly declining RCA for Assembled Mosaic Flooring Panels (134) and a relatively strong – but also declining RCA for regular assembled floor panels (16.5). It should also be noted that it reveals a comparative disadvantage for Office Furniture and Kitchen Furniture sales, which may perhaps indicate that the industry is not set up to 42 The revealed comparative advantage (RCA) index is used in international economics for calculating the relative advantage or disadvantage of a certain country in a certain class of goods or services as evidenced by trade flows. It is ratio of a product share in country exports compared to its share in the world trade. A value of RCA above 1 in good (or sector) of a certain country, means that country has revealed comparative advantage in that sector or good. It ranges from 1 to infinity for products in which a country reveals comparative advantage, but only from zero to 1 for comparative disadvantage products. 43 Note that the Furniture RCA/HH specified below includes non-wood based furniture. 44 The Herfindahl–Hirschman Index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. It is expressed as the summation of the squares of all the individual market share percentages. Market shares are expressed in terms of percentages. This value helps determine which company is in monopoly or if the market is fairly competitive. In an ideal, competitive market situation, the HHI should be close to zero, as the market share would be equally divided. If, however, only a single firm holds monopoly, then the HHI inches towards unity. An HHI value of less than 0.1 indicates good competition, a value between 0.1 to 0.18 indicates moderate concentration, and a value greater than 0.18 indicates high concentration. 21 sell to institutional buyers. The revealed competitiveness (or not) of these products underlies a more nuanced participation of firms in various strategic segments. Value Chain Step HS 6 Digit Level Products 2010 2011 2012 2013 2014 Upstream Prefabricated Buildings 4.37 7.16 6.60 8.59 12.1 Furniture, wooden 2.00 2.51 2.82 2.25 2.03 Office Furniture, wooden 1.18 0.48 0.43 0.84 0.86 Kitchen Furniture 0.52 0.39 0.41 0.36 0.55 Bedroom Furniture 1.097 1.16 1.15 2.13 2.29 Seat with wooden frames 1.92 2.081 2.05 2.01 2.05 Other Furniture 1.15 1.05 1.11 1.17 1.65 Midstream Assembled flooring panels (mosaic floors) 125 142 142 133 134 Assembled flooring panels 17.4 20.1 23.3 19.1 16.5 Veneer sheets 22.5 22.8 22.3 23 22.2 Densified wood 24.2 27.3 35 47.5 19.5 Beech (sawn/chipped/sliced) 135 143 187 181 204 Oak (sawn/chipped/sliced) 68.8 79.8 84.9 92.7 83.1 Downstream Oak (in the rough) 42.9 55.3 39.9 76.5 54.5 Beech (in the rough) 73.4 66.1 62 60.6 53.7 Fuel wood 67 81.1 95.5 85.1 71.6 Data Source: (Simoes & et alia, 2016) 22 According to Financijska agencija (Croatian Government Financial Agency, FINA) statistics in 2015 there were only 641 firms engaging in A02 Forestry and Logging activities, while there were nearly 2,192 engaging in the manufacture of wood products (C16)45, and 1,129 engaged in the manufacturing of furniture (C31). The manufacturing of wood/wood products represents both the largest turnover and the largest number of firms engaged in the sector. Primary forestry and logging activities are centered around Lika-Gorski Kotar and Slavonia where much of the country’s forest reserves are located. In order to reduce transportation costs associated with moving bulky logs46, sawmilling activities often happen near the point of removal, thus there is a strong correlation between A02 logging firm locations and C16.1 saw milling firm locations. This correlation is considerably weaker between A02 firms and C31 firms as a result of a) a strong export pull for sawmill products, b) less transportation costs associated with wood products than for industrial roundwood, and perhaps c) a more varied range of inputs to the furniture industry. This is a trend that has important ramifications for the natural resource value retention in national accounts. Spatial Correlation between Upstream A.02 Forestry and 300 Downstream C16/31 Industries Number of C16/C31 Firms by 250 200 County 150 100 y = 0.2454x + 51.647 50 y = 0.5741x + 15.7 0 0 20 40 60 80 100 120 Number of A.02 Firms By County C16.1 Firms in County C31 Firms in County The City of Zagreb (black dots) is an outlier in this distribution due to the low prevalence of forest and a high concentration of manufacturing industry. Conversely, the spatial correlation between saw millers and Furniture manufacturers is much higher, suggesting a stronger dependence of Furniture firms to the outputs of the sawmilling firms. Spatial Correlation between Sawnwood Supply (C.16) and Furniture Manufacturing (C.31) Number of C31 Firms by 300 200 County y = 1.4254x + 9.8319 100 0 0 20 40 60 80 100 120 Number of C16.1 Firms by County Data Source: FINA 45 Within C16 there are 682 sawmills (C16.1) and 1510 manufactures of other wood products (C16.2). 46 Industry experts roughly estimate that transportation costs are approximately 20 percent of the final value of the product. 23 It is important to note the high concentration of furniture firms around urban locations of Zagreb (black dots) and around Split (red dot) to a lesser extent (see Annex 2). A02: Forestry and Logging Firms C16.1 Sawmilling and planing of wood Firms C31 Furniture Manufacturing Firms C16.2 Firms Manufacturing products of wood Source: Author’s Depiction of 2015 FINA Data Using revenue figures from the Croatian Chamber of Economy (Hrvatska Gospodarska Komora, HGK), it is possible to depict export and domestic sale of sawmilling (C16) and furniture (C31) firms by county. In 2015 the city of Zagreb had the largest total revenue from the sale of wood with approximately 1.1 billion HRK in revenue. This is followed by Sisak-Moslavina and Primorje-Gorski Kotar counties. Sales in the latter are more export oriented, while sales in Zagreb are more domestically oriented. Furniture revenues were highest in Međimurje County (HRK 704 million), followed by Virovitica- Podravina, Bjelovar-Bilogora and the City of Zagreb47. The largest exporters of furniture are Međimurje County (HRK 412 million), Virovitica-Podravina (HRK 264 million) and Primorje-Gorski Kotar counties (HRK 186 million). Although the city of Zagreb has the most companies in furniture 47 In the Adriatic region, Primorje-Gorski Kotar County had the largest revenue at 258 million HRK. 24 production, exported values are significantly lower (HRK 96 million) than in the aforementioned counties. At the industry level, the average revenue per (C16.1) sawmill is HRK 6.1 million, while in (C31) furniture manufacturing average revenues were only HRK 4.9 million. The values of furniture would be significantly lower if the production of seats and manufacture of mattresses were excluded, which have an average income of HRK 44 million per business entity. In terms of regional distribution, Annex 2 maps out the distribution of employees and firms by County. The highest share of employees in the primary sector is visible in Varaždin, Osijek-Baranja, Vukovar-Srijem and Zagreb County. The highest share of employees in the manufacturing of wood is in Primorje-Gorski Kotar county and Zagreb County. Finally the highest share of employees in the furniture manufacturing sub-sector is located in the Virovitica-Podravina, Primorje-Goranski Kotar and Međimurje County.48 Labor productivity is estimated to be higher in C16 than C31. At the sub-activity level, the highest labor productivity was in the production of parquet while the lowest production is the production of kitchen furniture. From 2014 to 2015, there was a decline in employment as a result of reduced export demand. In 2015 the average annual income for employees working in the wood based industries was highest in A02 Forestry and Logging (Croatian Bureau of Statistics, 2016). Employment in Wood Industry Number of Employees 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - 2010 2011 2012 2013 2014 2015 Forrestry and Logging (A02) Manufacture of Wood (C16) Manufacture of Furniture (C31) 2015 Average Annual Employee Income by NACE Industry EUR HRK A02 Forestry & Logging EUR 9,667 Kn 72,504 C16 Wood & Wood Products EUR 5,960 Kn 44,700 C31 Furniture Manufacturing EUR 6,123 Kn 45,924 48 (Maxwell Stamp PLC, 2013B). 25 National Average EUR 8,950 Kn 67,128 Data source: (Croatian Bureau of Statistics, 2016) Using FINA statistics an analysis on the size of firms can be undertaken to identify the economies of scale at which firms are presently operating49. Although a large number of firms are of unknown size, available data approximates that 97% of all business entities are small enterprises. Medium and large firms together comprise the remaining 3%, and are more concentrated in sawmilling, veneer/wood-based panel and other furniture making activities. The existence of these few large firms in a sea of small firms may indicate that they are operating in a segment that has relatively high barriers to entry and different economies of scale necessary for existence. There are a number of firms engaged in the manufacture of office and shop furniture, however nearly all of them are small enterprises, which may contribute to weak export performance in this category. Number of Firms by Size & Subsector in 2014 0.1 0.21 0.22 0.23 0.24 0.29 0.01 0.02 0.03 0.09 Manufacture of other furniture Manufacture of mattresses C31 Manufacture of kitchen furniture Manufacture of office and shop furniture Manufacture of other products of wood, articles of… Manufacture of wooden containers Manufacture of other builders' carpentry and joinery C16 Manufacture of assembled parquet floors Manufacture of veneer sheets and wood-based panels Sawmilling and planing of wood Data Source: FINA small middle large 0 100 200 300 400 Data Source: FINA via (Savjetodavna služba, 2016). 49 FINA statistics compile financial data on Croatian companies gathered through collection of data from mandatory regulatory fillings of Croatian companies submitted yearly to FINA through standardized reporting. The figures quoted were compiled using the portfolio intelligence database provided by Bisnode. The data presented includes firms that have submitted a GFI-POD form in the last three years and are not in bankruptcy/liquidation process. While this filter attempts to differentiate ‘active’ companies from those that are established in title only (i.e. they have not operated for some years), the filter may result in under-reporting for small or start-up firms. 26 Using FINA statistics an annualized growth rate was constructed for number of firms, total revenue and employees in each NACE category50. Shifts in the functioning of the industry at the firm level can be detected by analyzing the relative changes in these rates. In C16 and C31 growth in revenue has far exceeded firm growth, suggesting that there are high barriers to entry; likely due to the change in policy instituted in 2012 and to new and stricter EU regulations51. Only in A02 has firm growth exceeded revenue growth, suggesting relatively low barriers to entry. Meanwhile employment in the primary sector has shrunk, likely the effect of a reported staff reduction at Hrvatske Šume (Presscut- Tobacco Report, 2016). 2013-2015 CAGR in Wood Based Industries Employees Furniture C31 Firms Revenue Employees Wood C16.2 Firms Revenue Forestry Sawmilling Employees C16.1 Firms Revenue Employees A.02 Firms Revenue -5% 0% 5% 10% 15% 20% Data Source: FINA While the above reveals structural shifts in the industry, it does not identify magnitudes of the margins. In a perfectly competitive environment (economic) profits tend to zero over time. Where barriers to entry exist and where firms or countries have some competitive advantage, profits can remain positive and persistent over the course of successive years. By calculating the average profit/loss per firm it is possible to get a clearer view of who is keeping the margins in the value chain. From these calculations it is apparent that firms further downstream are capturing most of the value in this industry and have some monopolistic advantage52. Higher value added sectors – such as furniture manufacturing – are operating in a more perfectly competitive environment. At the same time the HH market concentration index is rising, thus suggesting that while domestic competition of firms is increasingly weak, global competition is high. The dramatic rise in firm profits across all sub-sectors between 2013 and 2014 may be due to recent changes in the law53. 50 This analysis draws on FINA data rather than CBS data. While CBS data are the official statistics for the sector they often include dead or defunct firms. In order to get an accurate view of the ‘active’ industry, we have chosen to utilize FINA sources, although this may come at the expense of under-reporting actual figures for inactive, small or bankrupt firms. 51 “The wood-processing industry of every country in the process of EU accession is obliged to meet a series of legal requirements in the area of product safety, health safety and environmental protection. It is estimated that currently over 60 percent of the wood-processing companies in Croatia do not meet at least one of the EUs accession requirements (particularly in the primary production area)” (Maxwell Stamp PLC, 2013A). 52 In A.02 these numbers are largely driven by the Hrvatkse sume profits. 53 See (Uredba o dražbi određenih drvnih proizvoda, 2014) and (Uredbu o Dražbi Određenih Drvnih Sortimentata, 2015). 27 Average Profit or Loss of Industry Firms 2015 2014 2013 C31 Manufacture of furniture C16.2 Manufacture of products of wood, cork, straw, and plainting materials C16.1 Sawmilling and planing of wood A.02 Forestry and logging Data Source: FINA € (50,000) €- € 50,000 € 100,000 € 150,000 € 200,000 Innovation in the Wood and Furniture sectors can be key to productivity enhancements and the competitiveness of the sector. Although innovation is a notoriously difficult thing to measure, it is possible to break it down across three categories, namely product, process, and sales innovation. Patents – which can be differentiated between product and design patents – can be used as a proxy indicator for measuring product innovation54. From the below it is apparent that Croatian furniture firms tend to focusing more heavily on research and development (R&D) in design55. Patent registries in the sector peaked in 2013 when Croatia joined the EU, however they have since declined in tandem with the global economic slowdown which began in 2015. Croatian Furniture Patents 2011 2012 2013 2014 2015 2016 0 2 4 6 8 10 12 14 Number of Patents TABLES; DESKS; OFFICE FURNITURE; CABINETS; DRAWERS; GENERAL DETAILS OF FURNITURE (A47B) CHAIRS; SOFAS; BEDS (A47C) FURNITURE SPECIALLY ADAPTED FOR CHILDREN (A47D) SPECIAL FURNITURE, FITTINGS, OR ACCESSORIES FOR SHOPS, STOREHOUSES, BARS, RESTAURANTS (A47F) Croatian Patents for Industrial Designs in Furniture 2010 2011 2012 2013 2014 2015 2016 0 10 20 30 40 50 60 70 80 Numer of Patents SEATS BEDS TABLES AND SIMILAR FURNITURE STORAGE FURNITURE COMPOSITE FURNITURE OTHER FURNITURE AND FURNITURE PARTS Data Source: (The State Intellectual Property Office, 2016) 54 The countries with the most furniture patent are China, the United States, Japan, Republic of Korea, Germany, Spain, United Kingdom, and the European Patent Office. It is interesting to note that on the list of leading innovators are densely populated countries – such as China, Japan and the Republic of Korea – with the highest space constraints, which may be a reason that they are amongst the leading innovators in the field. 55 Data in the graph reflect registered patents up till October 2016. The 2010 value (73) for Industrial design patents in the graph reflects all patents registered up to 2010 (i.e. 1990-2010). 28 Process and sales innovations can be just as key to the competitiveness of the industry. For example, realignment of production lines to react quickly to changing market tastes can be important in this fashion-intensive industry56. Anecdotal evidence suggests that a few furniture firms are beginning to integrate their product sales with services – such as installation, warranty, repair, etc. – in order to cater to institutional buyer demands, however it seems that this practice is much less prevalent. 56 Increasingly consumers are turning to firms and online platforms (e.g. Etsy) which can meet specific and tailored production requests. 29 A number of bodies are engaged in supporting and regulating wood production and processing firms. Notably the Ministry of Agriculture (MOA) and the Ministry of Economy (MINGO) each contributes to the policies surrounding the sector’s sustainability and growth. The Ministry of Economy has been particularly active in supporting the commercialization of the sector and in enabling greater access to international markets. Meanwhile, the MOA has an entire division devoted to Forestry, Hunting and Wood Industries with responsibilities spanning from the establishment of sector policy to inspection. A number of bodies are engaged in regulation and monitoring of the wood production and processing sector. The Ministry of Economy both sets commercial policy regarding the sale of forestry products and conducts inspections – through its Division for Economic Inspection – for conformity to national standards, particularly for those regulations regarding the export of product (Uredbu o Dražbi Određenih Drvnih Sortimentata, 2015). The MOA’s Sector for inspection in forestry and hunting is responsible for ensuring application of national regulations and EU directives on forestry management (Timber Regulation, 2010). Other public and semi-public bodies also assist in these functions as well. The entire system of National Quality Infrastructure (NQI) necessarily relies on a system of interlinked private and public actors that conduct inspections, provide testing reports and certify that firms are meeting some mix of both public and private (e.g. FSC) standards. A conceptual depiction of how some of these actors interact is depicted below. 57 The Croatian Bureau of Statistics – Agriculture, Forestry, Fisheries and Environment Directorate, provides production, price and account statistics on the forestry sectors. 30 A few accredited bodies are also important contributors to the NQI system (Croatian Accreditation Agency, 2016). These notably include:  The Croatian Forest Research Institute (CFI) is a public institute which conducts research and development in biotech and forestry. It is also operates a lab accredited (HRN EN ISO/IEC 17025:2007) for the testing of wood, seed and plant material.  The Faculty of Forestry, University of Zagreb operates an accredited lab (HRN EN ISO/IEC 17025:2007) for the physical testing of wood construction products, paints and glues.  EUROINSPEKT – DRVOKONTROLA is a private certification agency (HRN EN ISO/IEC 17065:2013) incorporated in Croatia. The firm operates an accredited lab (HRN EN ISO/IEC 17025:2007) for the testing of furniture and wood industry products. Prior to joining the EU all product testing and certification went through this provider, while afterwards firms have been able to get product tested and certified by any accredited EU body.  Foreign Testing and Certification service providers have been increasingly utilized since joining the EU. In recent years eleven FSC accredited agencies58 have granted certifications to enterprises in Croatia. Research and educational institutions are also heavily involved in the sector. Some notable ones are listed below:  The University of Zagreb plays an important role in both training labor for forestry based industries and in R&D for the sector. Most notably the Faculty of Forestry graduates almost 1000 students per year and operates a number of R&D labs. The Faculty of Architecture is also a vested agent in the cluster and trains a number of students that feed into the furniture industry. The Faculty for Chemical Engineering & Technology have furthermore played a part in R&D for the sector in some more minor degree.  R&D Centers: Over 20 R&D laboratories exist in Croatia, with the vast majority of them concentrated in Zagreb. These research centers each have a particular focus, but like the industries they are researching they can be broadly grouped against A02, C16 and C3159 categories (Maxwell Stamp PLC, 2013A). The Danube Transfer Centre Slavonski hrast is one such center established by the Vukovar-Srijem County government to meet the R&D needs of the private sector in the county.  Technical and Vocational Schools: A number of technical secondary schools and vocational training institutes relevant for the Wood Production and Processing industry are also established in Croatia, notably including; the Forestry and Carpentry School in Karlova, the Technical School at Varazdin; the Carpenters’ school in Zagreb; the Handicrafts School at Koprivnica; and the Construction School at Cakovec. A number of semi-public bodies are also involved in support of the sector in some way, including the following: 58 The FSC certification agencies operating in Croatia include; Bureau Veritas (25 valid certificates), Control Union Certifications (1), DNV (1), GFA Consulting Group GmbH (2), ICILA S.r.l (2), NEPCon (2), Rainforest Alliance (2), SGS (121), SKH B.V. (1), Soil Association (70), and TUV (77). 59 There is purportedly a Laboratory for Furniture and Furniture Parts Testing. 31  The Croatian Bank for Reconstruction and Development, which has extended preferential credit lines to many wood processing enterprises. Over the past 20 years this credit line is estimated to have exceeded 680 million EUR (Maxwell Stamp PLC, 2013A).  “Savjetodavna služba” is a government run entity that provides advisory services for enterprises in the forestry sector, amongst others.  The Croatian Chamber of Economy has a Sector for Agriculture, Food and Forestry – and a subdivision for the Association of Wood Processing Industries – which has assisted in the introduction of the 2007 "Drvo je prvo" (Wood comes first) campaign in joint cooperation with the MOA and Hrvatske Šume.  The Croatian Competitiveness Cluster for Wood Processing was established by the Croatian Agency for Investments and Competitiveness (“Agencija za investicije i konkurentnost” [AIK]) in 2013 to access grants and to provide a platform for cooperation in the sector. The cluster claims 53 private sector members, along with a number of public entities, professional organizations, associations, and institutes. Hrvatske Šume was recreated as an SOE on 1 January 1991. It is governed by a board appointed by the Government. Its profits have steadily increased since EU accession, including a 45.4% increase from 2014 to 2015 although over the same period total revenues decreased by 1% to HRK 2.08 billion. Its increase in profits was achieved through cost reduction (Presscut-Tobacco Report, 2016). The top companies by revenue size in Croatia are listed in the table against the relevant NACE code60. A02: FORESTRY & REVENUE C16.1: WOOD REVENUE C16.2: WOOD REVENUE C31 FURNITURE REVENUE LOGGING (€) MANUFACTURING (€) PRODUCTS MANU. (€) MANUFACUTRING (€) HRVATSKE ŠUME 274,693,259 ŠERIF EXPORT-IMPORT 42,535,487 Kronospan CRO* 27,627,558 PRIMA COMMERCE. 46,366,218 GOD 9,410,223 CEDAR D. O. O. 29,626,804 ELGRAD 23,619,420 LPT* 45,101,531 BINĐO 4,117,384 DRVNI CENTAR GLINA 19,048,636 SPAČVA d.d. 22,126,201 Hilding Anders* 29,904,497 ŠUMSKA BIOMASA 3,945,075 STRIZIVOJNA HRAST 18,299,885 DECOSPAN MATO* 15,599,639 SPIN VALIS 15,873,630 FAUNUS SELVA K.D.* 2,952,113 A.M.S.-BIOMASA 18,160,768 SLAVONIJA DI * 14,993,998 PROMMING 15,474,556 SUNČANE ŠUME 2,594,057 TEHNO - DRVO 16,443,550 DRVODJELAC 13,573,461 CONTORTE 15,176,940 METVICA TRGOVINA 2,585,452 LIPOVLJANI LIGNUM* 14,928,327 SOLDUS 11,727,219 TVIN 14,072,043 TERRA CONCORDIA 2,229,913 VIŠEVICA-KOMP 13,777,063 IVERPAN 10,277,904 DI KLANA* 14,066,681 ZLATKO-COMMERCE 2,049,014 POŽGAJ 10,524,119 INTERIJER-DRVOPA. 8,858,052 CIPRIJANOVIĆ 12,921,530 ILIĆ-ŠUMARSTVO 2,030,000 MMM-VUKELIĆ 10,353,484 PAN PARKET* 8,484,052 SOBOČAN- 8,687,997 60In the A02 category Faunis Selva is a German owned company. In C16.1 Lipovljani Lignum is an Italian owned company. In C16.2 Kronospan is 99.95% Cypriot owned; Decospan is partially Belgian owned; Slavonija is 74% Slovenian owned, Pan Parket is 20% foreign owned. In the C31 category LPT (original name L&P Tehnologije) is a Dutch owned company, Hilding Anders is Swedish and Belgian owned and DI Klana is Italian owned. 32 INTERIJERI *DENOTES FOREIGN OWNED FIRM Source: (FINA, 2015) However, as discussed previously, the private sector is dominated by a variety of SMEs ranging across these same NACE categories. Some of these SMEs freely associate in the AIK cluster or in privately led clusters. Cluster organizations are one tool for raising competitiveness, but there are often problems with measuring how much and in what way they can contribute in raising competitiveness. Cluster development in the Croatian Wood sector dates back to as early as 2003 when the industry was attempting to organize export promotion in conjunction with the government (Zekić, Samaržija, & Dukić, 2015). Today there are three cluster organizations founded by public entities, including the wood industry Clusters of Vukovar Srijem County, Virovitica Podravina County, and the Croatian Competitiveness Cluster for Wood Processing Industry. Additionally at least nine private sector clusters have been established under private sector initiatives61. Name of the Cluster Founded City/County No. Of members Forest Clusters Croatian Association of Private Forest Owners 2008 Zagreb n.a. Alliance of Private Forest Owners Varazdin n.a. Varazdin 8 Wood clusters Wood Cluster of North-West Croatia 2005. Varaždin 9 Slavonian Oak62 2010. Vinkovci 23 Viridis63 2011. Virovitica 10 Masiva 2012. Pleternica 6 Croatian Wood Cluster64 2012. Zagreb 75 Wood processing cluster of Lika-Senj County 2012. Otočac ~22 Kupa 2012. Karlovac n.a. CROatian BIOMass association (Crobiom) 2012. Zagreb n.a. Valis EU 2013. Požega 5 Croatian Competitiveness Cluster for Wood Processing 2013 52 Furniture Clusters Cluster TEHNOINTERIJERI65 2006 Zagreb n.a. (Ministarstvo uprave, 2016) Growth in the number of clusters in 2012/2013 is partially attributable to the potential access to EU structural funds. Many of these cluster organizations have placed primary focus on the development of an organization or lobbying strategy, while few have devoted resources to developing a market- based business strategy. In 2016 some industry experts have suggested that divergent interests and insufficient incentive make many of these cluster organizations formal in name only. Beyond the clusters which represent the interests of firms, a number of associations exist to represent professions and individuals in those professions. Some notable ones include: 61 Other non-registered cluster organizations exist as well with varying levels of reported activity. Croatian Interiors is not a cluster in the formal sense but it was founded in 2009 as a conglomerate of 8 companies and 2 individuals. 62 The Slavonian Oak cluster is member of Croatian cluster competitiveness of wood-processing sector, Croatian wood cluster, and has signed cooperation agreements with the Zagreb Faculty of Forestry and Wood cluster Styria in Graz (Austria). 63 The cluster was founded by entrepreneurs from the wood - processing sector in the county and two supporting institutions, VIDRA - Agency for development Virovitica- and Faculty of Forestry, University of Zagreb. 64 Members of the cluster include some Associations, such as: the Association of Producers of pellets, wooden biomass and related technologies, Flooring/Parquet manufacturers, Wood Cluster KUPA Karlovac, Wood and paper industries Union, WOODEMA. 65 This furniture cluster is not officially registered. 33  The Croatian Chamber of Forestry and Wood Technology is an autonomous professional organization – established by the MOA, the Croatian Forestry Society, the Faculty of Forestry, the Forest Research Institute and Hrvatske Šume – to provide technical guidance to the sector.  The Croatian Forestry Society is an association of engineers and technicians working in forestry and wood processing66.  The Academy of Forestry Sciences is an association of scientists engaged in promoting forestry science and influencing forestry policy. These cross-cutting professional associations are primarily interested in networking and lobbying. In some industry and country contexts, professional associations can also act as certification bodies for the competency/technical skill of individuals. In recent years foreign investors have increasingly played a role in the Croatian wood production and processing industry. With a domestic market estimated at 200-300 million euro, a range of resource seeking companies – such as Calligaris (Italy), Kronospan Group (Switzerland) and the Hass Group (Germany) – are purported to have set up primary production plants in Croatia (Maxwell Stamp PLC, 2013A). These linkages have enabled technology transfer and collaboration with other European countries, including Italy (Wood-Technological Institutes Cosmo Pesaro and Cates Udine), Austria and the German wood sector in Bavaria (Maxwell Stamp PLC, 2013A). In the primary production sector, Faunis Selva, a German-owned company invested in Croatia for resource seeking motivations. Lipovljani Lignum, an Italian-owned company, likely also invested locally as a result of the domestic content requirements and the transport costs associated with the movement of raw materials. In upstream markets, LPT (Dutch), Hilding Anders (Swedish/ Belgian) and DI Klana (Italian) made efficiency seeking investments in furniture manufacturing plants. The vertical integration model of these European companies may serve as a template for Croatian furniture firms wishing to secure a more reliable source of input supply. More recently, the Croatian furniture industry has purportedly struggled from the introduction of low cost furniture brands – such as IKEA – to the domestic market. Hopes of local producers supplying the retail giant have not eventuated. The procurement requirements are not conducive to the current Croatian industry, which is operating at smaller economies of scale and with different cost structures. The wood production and processing industry has shifted considerably since Croatia joined the EU. It has been noted that while the industry is large and expanding, there is little commonality that binds the actors together. To understand the root of these divergent interests it is only necessary to understand the underlying political economy and the distribution of rents along the value chain. Currently in resource constrained environments, agents in upstream primary production and sawmilling industries will have little incentive to cooperate or change given the rents they are 66 Members of society include: The Chief editor of Forestry Journal, the Ministry in charge of forestry, Faculty of Forestry, Department of Forestry, Wood Technology Department, Croatian Forest Research Institute, Academy of Forestry Sciences, Croatian Chamber of Forestry and Wood Technology and at least one prominent member of the profession that stands out in the work of Croatian of Forestry society. 34 currently garnishing. Downstream agents are faced with increasing global competition for both input supply and on output markets.  In input markets: High quality inputs are being pulled into firms that are able to pay higher prices than the Croatian furniture manufacturers can afford with their current business lines.  In output markets: Increasingly, secondary processing activities are taking place through agents that are increasing their global market share. As such these downstream functions are increasingly being outsourced to the regional value chain agents that are operating more efficiently in countries such as Italy, Egypt and Slovenia. To capture more value in Croatia the business incentives of each of the actors will have to be aligned through a strategy that reengineers the entire wood production and processing sector towards a segment that holds a high value for each agent. Schematic of Agent Interaction in an Indicative Wood Production and Processing Value Chain Legend: 35 36 As a whole, the Wood Production and Processing sectors have witnessed success in recent years as integration into the European economy has created increased demand for Croatian wood. The wood production industry has a comparative advantage in high quality wood, owing to the ample natural resources of the country. While the industry has been susceptible to the global economic shocks, the industry maintains a distinctive advantage in primary production and in intermediate product processing. In fact, over the past three years the sawmilling industry has become much more profitable through integrated into the global value chain; a mixture of FDI and outsourcing contracts have centered on linkages with firms in Slovenia, Austria, Italy, and Germany. Croatian sawmills are even increasingly sourcing raw inputs from abroad for further refinement and re-export. However, integration into the EU economy has also precipitated a shift in the structure of the industry with a higher portion of resources being committed to the renewable energies (through fuel wood67) sectors at the expense of manufacturing sectors. Increasingly intermediate sawn wood products are being sent for exports to furniture manufacturers in Italy and Egypt. These shifting incentives have benefited upstream firms disproportionately with large profits being accumulated by firms operating in those industries over the past three years. While the downstream furniture industries are expanding their exports they have been increasingly concentrated in a few firms. Meanwhile individual firm profits have tended towards zero. Thus while there is a relative decrease in competition in the domestic sector, the remaining firms are increasingly competing with foreign firms in a perfectly competitive global market. This is also reflected in the RCA values which show stagnation at levels just above ‘competitiveness’ in most categories. There is also much indication to suggest that (typically small sized) furniture manufacturers are not well positioned to sell to large institutional buyers nor are they systematically innovating with their sales techniques. More encouragingly, the production of prefabricated buildings – a product that has similar factor intensities and production processes to furniture – is also beginning to register on trade statistics in Croatia. This is the only product in the grouping that is increasing export performance over the past year despite the global slowdown. More broadly, the 2015 global economic slowdown presents an opportune time for a retrospective stocktaking to map how the industry has evolved and to assess how it may reposition itself to improve performance in an increasingly competitive and volatile global market68. It is apparent that in order to improve the competitive position of furniture manufacturers, a realignment of actors and segments will need to take place. 67 The production of wood fuel sector has also taken off as a profitable activity as a result of the reduction of tariff barriers and the pull of renewable energy subsidies. 68 Croatia’s wood industry exports saw a 21 percent decline as a result of the 2008/2009 global financial crisis. The industry is known to be highly tied to the housing and manufacturing sectors and so trends in these linked industry often precede trends in forestry products demand (Prestemon, Wear, & Foster, 2015). 37 Policy Instrument Responsible Agency Purpose Wood Energy Policies. Government To increase energy efficiency through improving use of renewable energy sources, such as industrial wood-processing. National Forestry Strategy Parliament To established the forestry sector role in the mitigation of climate change through the use of biomass. Development of Industrial wood and Ministry of Agriculture, To increase the export of finished products and the placement of paper processing strategy Forestry and Water final products in the market. Management (former) Operational Program for the Ministry of Agriculture, To identify the specific measures for supporting the wood Development of the Wood Processing Forestry and Water processing industry sector through the development of new Industry Management (former) products, brand management and continuous development of the wood processing industry as a whole Project for the Sustainable FAO To find viable solutions for the development of the wood/charcoal Development of the Charcoal Industry industry and the national bioenergy sector at large. in Croatia (TCP/CRO/3101) (2006- 2008) Wood Promotion Program “Drvo je Croatian Chamber of To increase wood consumption in Croatia and to increase prvo” / “Wood Comes First” Economy; Hrvatske consumer awareness about the benefits of using wood and wood Šume; Ministry of products, especially from domestic production. Agriculture, Forestry and Water Management (former) Furniture design strategy 2010-2012 Ministry of Regional To encourage the development of Croatian furniture manufacture Development, Forestry & through the design and acquisition of significant advantages in Water Management in the global and competitive market. Croatia Cluster development strategy 2011- Ministry of Economy, To clearly describes the strategic approach, as well as specific 2020 Labor and objectives and method of cluster development in Croatia Entrepreneurship (former) The Strategic Guidelines for the Ministry of Economy To encourage economic growth and the competitiveness of Development of the Wood Processing wood processing sector through research, technological Industry Sector 2013-2020. development and the application of innovation & new technologies and through the inflow of investments. Croatian wood competitiveness cluster AIK To facilitate a platform for industry actors to voice industry needs strategy and operational plan (2014- and to serve as a vehicle for public investment to improve the 2016) competitiveness of the wood sector. Industrial strategy (2014-2020) Government To set out an analysis of the industry and to present a strategy for each subsector of the economy. Smart specialization strategy (2016- Government To identify key thematic and sub-thematic areas for investment 2020) in R&D topics in the wood industry. Development Strategy of Wood Savjetodavna služba To provide advisory services to the Wood Processing and Processing and Furniture Furniture Manufacturing industry Manufacturing of the Republic of Croatia (2016-2020) Wood Processing Strategy “Izgradimo Chamber of Economy To provide a strategic vision on the regulation and management Smedu Magistralu” of the sector. 38 Source: CIRAZ rendering of HGK Statistics 39 Source: CIRAZ rendering of HGK Statistics 40 As a whole, wood production and processing activities are captured under EU NACE codes aligning with several major categories, including: NACE Code NACE Category Description A.02 Forestry and logging C.16 Manufacture of wood and of products of wood and cork, except furniture; manufacture of articles of straw and plaiting materials C.16.1 Sawmilling and planing of wood C.16.2 Manufacture of products of wood, cork, straw and plaiting materials C.17 Manufacture of paper and paper products C.31 Manufacture of furniture (Eurostat, 2008) Within each NACE code, production is further divided according to various criteria, such as type, size, purpose, manufacturing technology, and material of the final product69. While the codes for the Manufacture of furniture would obviously include inputs of non-wood materials (e.g. metal, plastic, glass, stone, etc.) a significant share of the furniture made in Croatia uses wood inputs. The following is not a value chain, but rather a product map showing the various routes that cellulose based materials can flow through before reaching the its final consumable form. Coniferous (‘softwood’), and Non-Coniferous (‘hardwood’) varieties of trees can both be used to make roundwood. Hardwood is generally of higher quality/price. 69Notably the C31 furniture manufacturing sector can be divided between furniture/pre-fabricated buildings made primarily of wooden materials and those not. 41 The primary product of the forestry sector is industrial roundwood. Lumber can be cut from industrial roundwood using a number of different techniques, including: The Plain Sawn technique optimally utilizes the raw industrial roundwood by making parallel cuts through the entire log. It produces a plank that has the ‘cathedral’ look on the surface, however it is more susceptible to warping and twisting due to the angle at which the tree’s growth rings are aligned. This technique is the least time intensive way to cut the log, but it has repercussions for value. The Quarter Sawn technique is used by first cutting a log into quarters. This allows the cut to be more perpendicular to the growth ring in order to produce a more stable board with a straighter narrower grain pattern. In the process this produces more waste than the Plain Sawn technique, but provides some boards that are more structurally stable. The Rift (Radially) Sawn technique is where the lumber is cut perpendicular to the tree’s growth rings at every step. This results in a straight grain pattern that looks uniform in each cut. This is the most stable wood that can be purchased, but it also produces the most waste from the industrial roundwood and is therefore the most expensive. Source: (AdvantageTrimLumber, 2011) These methods therefore have opposing effects on quality and resource efficiency. The qualities of wood – i.e. durability, design, and resource efficiency – from these various cuts and the subsequent drying70, planning and refining all effect the grade and value of the lumber and therefore the potential value chains that the product will be eventually be suited to enter71 (Wiedenbeck, Wiemann, & Alderman, 2003). 70Warping and twisting is prevented by placing the logs in an oven like chamber that dries the pieces rapidly. 71A range of byproducts are made from producing lumber. The byproducts of the sawing process – e.g. wood chips, pulp, etc. – are often used to make various other manufactured products of note. 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